2. TRANSPARENCY: INCREASING CLARITY IN
CREDIT CARD CHARGES:
Transparency and competition
Recommendation 6: While the UK credit card industry
considers itself competitive, we feel that while consumers cannot
properly compare products the level of competition is inadequate.
We want to make it more competitive, by giving consumers clear
information to choose between cards
and we hope that
providing consumers with clear and transparent information about
what are necessarily complex products will become a priority.
2.1 The Government agrees with the Committee
that competition is enhanced by the provision of better information
to consumers. That is why one of the main drivers behind the package
of proposals in the White Paper is improving transparency for
consumers. The new regulations on the form and content of credit
agreements will ensure that core information is given to consumers
before they enter into an agreement, to enable them to compare
products and select the one that is most appropriate for them.
They will also comply with the requirements of the Distance Marketing
of Consumer Financial Services Directive. Following on from this,
credit agreements will have to show prominently above the borrower's
signature all the main financial details and other key information,
including the interest rate and the total charge for credit applicable
to the individual consumer. Together, these provisions will ensure
that transparency is greatly improved and that consumers will
have full information about credit products before agreeing to
sign up for them.
The need for a summary of key information
Recommendation 8: DTI's review of the regulations
should place the principle of the Summary Box on a statutory footing.
2.2 We welcome the industry initiative to provide
consumers with a Summary Box setting out the main features of
credit card agreements. It provides a good basis on which to develop
the format of our proposals on pre-contract information.
2.3 The Summary Box initiative covers pre-contract
information about credit card agreements. The Government's proposals
will extend to pre-contractual information for all regulated credit
agreements and the content of credit agreements themselves, as
detailed in the consultation paper published alongside the White
Paper. We will require key information about credit agreements
to be provided before the consumer enters into an agreement as
well as upfront in the agreement itself. We intend to test out
sample pre-contract information and illustrative agreements on
consumers before reaching final decisions on the detailed regulations.
Information on monthly statements
Recommendation 14: We welcome the DTI's intention
to explore with industry and consumer groups the scope for using
the monthly statement to educate consumers about the implication
of the debt they are taking on. This could include examples of
how long the debt would take to repay for a given monthly payment.
Recommendation 36: Consumers need to be provided
with clear information on statements showing that [only paying
the minimum payment] will maximise the length of time needed to
clear the debt and the amount of interest paid. Statements should
show how long it would take for the debt to be paid off if only
the minimum payments are made.
Recommendation 37: The minimum payment should
always cover the interest on the outstanding balance (and any
payment protection insurance premium) so that by making the minimum
payment households should never be increasing the size of their
2.4 The Committee is right to identify the need
for consumers to be provided with clear and regular information
during the course of their contracts.
2.5 As set out in the White Paper, we will be
introducing a requirement to include on statements a warning about
the implications of only making minimum payments on credit card
debt. This will need primary legislation, which will be brought
forward as soon as Parliamentary time is available. We are discussing
with the industry what form such a warning might take and what
scope there is for providing illustrations of various different
repayment scenarios on statements. In the meantime, we are pleased
that the industry has agreed voluntarily to add a warning to credit
2.6 APACS have advised us that there are no credit
card lenders who set minimum payments below the amount of interest
to be added to the account each month.
Annual Percentage Rates (APRs)
Recommendation 15: We were astonished to discover
that the APR figure most commonly used by consumers to compare
credit cards is allowed to be calculated in more than one way.
This is clearly unacceptable, impedes competition and damages
consumers' ability to compare products. The fact that such a situation
has been able to persist for several years reflects badly on all
Recommendation 16: The DTI, OFT and the industry
should continue dialogue in an attempt to establish a commonly
and legally acceptable working interpretation in advance of October
2004. This should be implemented as soon as possible. We welcome
the Minister's commitment that the October 2004 deadline will
not be missed, and that the work will be seen as a priority.
Recommendation 17: We believe the proposals in
the White Paper to calculate the APR using the "go-to"
or standard rate for purchases after any introductory period will
provide a clearer and more understandable basis for consumers
on which to compare cards than any blended rate.
2.7 The Consumer Credit White Paper re-affirmed
the Government's commitment to achieve a single, consistent approach
to the calculation of APRs.
2.8 A single set of assumptions for the APR used
in advertisements - based on the standard "go-to" rate
for purchases -was included in the consultation document published
alongside the White Paper. A single calculation method will be
brought into effect alongside revised Regulations on the advertising
of consumer credit by October 2004.
2.9 While we understand the Committee's desire
to see the credit industry and Government agree a common approach
to the APR as soon as possible, changing to a single interpretation
ahead of a substantive change in the law could call into question
the legality of many thousands of existing agreements.
Interest calculation method
.We welcome the DTI's
intention to discuss with the industry ways in which interest
calculation methods can be standardised and made more transparent
without inhibiting competition. The DTI aims to conclude discussions
by February 2004 and we will be looking for prompt action after
that date has passed. The onus will be on the industry to prove
that a measure of standardisation will not be beneficial.
2.10 The Government is concerned about consumers
not knowing how interest is applied to their credit card account
when this can have a great impact on the amount of interest that
they pay. However, we also have concerns that any enforced standardisation
of applying interest would stifle competition and product innovation.
We are discussing how far the improved transparency for consumers
- brought about by the APACS Summary Box and the Government's
Form and Content proposals - deals with this interest application
issue. Consideration is being given to setting down in regulations
a requirement that the information which currently appears in
Summary Boxes concerning how each lender calculates its interest
charges must be clearly explained in the pre-contract information
and also in agreements.
Recommendation 19: Risk-based pricing is a practice
which raises serious transparency issues, as consumers are often
unaware of the rate they will be charged until after the card
has been received. This is an unacceptable practice. We are also
concerned that the very act of shopping around by applying for
several different cards can damage a consumer's credit rating.
The OFT should monitor the proportion of customers who obtain
the favourable rates advertised and those who end up on the higher
rates. It should ensure that a system is put in place to prevent
consumers being misled.
Recommendation 20: Where a range of products is
offered, consumers should not be offered a more expensive product
without clear, written reasons. We believe the issuer should also
be required to obtain a positive acceptance from the consumer
before issuing a card. Exclusions that apply to cards, such as
minimum ages or annual incomes should be clearly advertised in
the marketing literature.
Recommendation 21: Consumers offered less favourable
terms than the typical APR should be provided with a free copy
of their credit reference by the lender. The regulators and the
industry should develop a strategy for promoting awareness and
a sense of ownership amongst consumers of credit references and
the factors that affect their credit score. Consumers should be
actively encouraged to provide the firm with positive information
to reduce the rate charged. Firms should also share both positive
and negative data with the credit reference agencies.
2.11 The amended Regulations on the form and
content of credit agreements will require lenders to include in
the credit agreement the precise interest rate the consumer will
have to pay. The consumer will have to agree to that specific
rate before the contract comes into being. Consumers will, therefore,
always know their allocated rate of interest before entering into
a credit agreement and will have had to show their acceptance
of that specific rate if the account is to go live. In addition,
the new Regulations on advertising will require that any advertised
typical interest rate must be available to at least 66% of borrowers.
All advertisements will have to be clear, fair and not misleading.
Where consumers are declined an advertised rate, we consider
it good practice for lenders to explain why their lower rate was
2.12 There may be a number of reasons for offering
a consumer less favourable terms than the typical APR, which may
not necessarily relate to the credit reference agency record.
Moreover, the lender does not (and is not entitled to) receive
a record in the form that it is held by the credit reference agency.
It is therefore likely to be more helpful for consumers to receive
an explanation of the decision from the lender than a copy of
the information received by the lender from the credit reference
agency. Consumers can themselves get full copies of the credit
records from the agencies for a fee of £2.
2.13 We are pleased to note that from April 2004
lenders will be able to link their systems into new software that all three
credit reference agencies will offer. This will make it possible
for lenders to make the checks necessary to offer the customer
a quotation for the amount and cost of credit without that appearing
as an "application footprint" on the consumer's credit
record. Only when the consumer decides to make an application
on the basis of the quotation will a footprint be left. This will
mean that consumers can shop around without it damaging their
2.14 DTI's Task Force on Over-indebtedness, which
ran from October 2000 to Autumn 2002, recommended that lenders
should share positive as well as negative data through credit
reference agencies. We will be monitoring progress on this and
other recommendations through the new cross-Government machinery
outlined in the White Paper.
Transaction / Penalty charges
Recommendation 23: Consumers need to be aware
of the extent and the exact amount of any possible transaction
charge or penalty fee.
2.15 The Government agrees that any charges that
may be made should be made clear to the consumer. Lenders will
be required to state the level of any charges payable by the consumer
under the credit agreement. Where the amount of the charge cannot
be stated at the outset, the lender will have to state the precise
methodology that will be used in determining them. Consumers already
have a degree of protection against unfair charges under the Unfair
Terms in Consumer Contracts Regulations. We note that such transaction
and default charges are a key feature of the Summary Box
The level of fees charged
Recommendation 24: To reassure us and the general
public we call on all lenders to place information on the amounts
raised from penalty fees and the costs involved in the public
domain. The DTI should investigate this issue.
2.16 OFT is investigating whether the charges
made by lenders and how the levels relate to the actual costs
to the lenders of the consumer behaviour in question are consistent
with the requirements of the Unfair Terms in Consumer Contracts
Regulations. We will consider in the light of the outcome of that
investigation whether any further action is needed.
Recommendation 26: Both the OFT and the DTI, in
its review, need to address the regulatory aspects governing
products [which encourage consumers to get into more debt in order
to take advantage of special offers] and their promotion.
2.17 The Government notes that OFT took action
over the criticised Barclays "0% forever" product offer
which it regarded as misleading. While DTI recognises that, on
occasions, special offers can be advantageous to consumers, the
proposed Regulations on advertising and agreements will require
lenders to be more transparent in how these are presented. Lenders
will still be able to advertise special offers, but they will
have to provide clear information about other aspects of the card.
The principal rate quoted in all advertisements will be the APR
based on the standard rate for purchases.